Market Wrap-up for Dec. 10 - Telecom Competition Heats Up

Market Wrap-up for Dec. 10 – Telecom Competition Heats Up

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Telecommunications stocks are often favorites of dividend investors, as they typically offer stable and attractive yields. AT&T (T) and Verizon Wireless (VZ) are two shining examples, as both stocks are darlings of the value world with yields upwards of 4.5%. They are also the two largest telecom providers in the U.S., but a fierce competition has been heating up over the last few years that threatens these telecom giants’ profitability – and their ability to remain competitive.

Telecom Giants Hit Hard

In case you do not watch much television, for every commercial that AT&T or Verizon runs boasting their services, there is another from competitors Sprint (S) and T-Mobile (TMUS) describing how their services are cheaper than their larger counterparts.

One example is a new campaign from Sprint in which the company will cut a customer’s bill in half if they switch over from one of the other carriers. T-Mobile, meanwhile, has long offered to pay early termination fees for those who make the switch. While these two firms are significantly smaller than the blue chips AT&T and Verizon, they are starting to have an impact.

Since the start of December, T shares have dropped nearly 8% and VZ by 9%. This selling pressure comes after both companies admitted that profits are expected to take a ding due to increased competition in the space, which led to several firms downgrading the two stocks. But it was not just these two, S and TMUS also saw significant selling pressure as their competitive efforts have hurt the industry as a whole.

Looking to 2015 and Beyond

The reality of the situation is that S and TMUS cannot continue these price cutting practices forever. They have a slight advantage in that they do not pay out dividends, but remaining profitable while offering massive cuts is very unlikely over the long-term. S and TMUS certainly may put a dent in the giants, but it remains to be seen if that is just a short-term bump in the road or if it is more of a long-term trend.

If Verizon and AT&T want to play ball, they have the cash and size to undercut these competitors and put a massive anchor in their profitability, if not take them down entirely, but it would mean taking a hit on earnings themselves. For the time being, it appears that the two giants are content to ride out the storm, as they know that the deals offered by their competitors are unsustainable over the long-term.

Still, it is a situation that deserves a close eye from investors, especially those with positions in any of the stocks mentioned above. Look for this to continue to be a major theme in the telecom industry in 2015.

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